I agree that we should not schedule our students for testing unless we believe they are ready, however that does not guarantee their advancement. Testing is not merely about regurgitating their rank requirements but mentally assessing if the student is ready to be exposed to the next level of their training. If their requirements symbolize the "Body," then everything else throughout the exam symbolizes the "Mind" and "Spirit" that we all profess to teach. Testing is supposed to push the student beyond what they believe they're capable of, constantly pushing the boundaries and testing their understanding, not just their ability to repeat what they've been shown.
Now, what happens when a student fails an exam? Are the only two options pass and fail? How bad does a student have to perform to actually fail?
Students, especially children, should not be completely penalized for having a bad day, however as an instructor you know there are times you cannot in your right conscience fully promote that student to the next level. This could be because there were some things they need to clean up, some aspects of the testing that they struggled on more than they should've, or a myriad of other reasons that aren't enough to warrant an outright failure. I address this by awarding them a temporary rank. They will receive their belt as part of the normal promotion ceremony, however I withhold their certificate until a later date. I tell the students they can retest with the next cycle, letting them know exactly what I expect to be fixed, but more often than not I present their certificate a week or two later in front of the regular class. Students are more resilient than we give them credit for, and sometimes a temp is just enough to kick that student into gear and get them on the right track. It's a motivator, and a good compromise between pass and fail.
No instructor wants to see a student quit, and there are times I've compromised my beliefs to keep a student, especially one that I've connected with on a personal level. However, we also have to realize that 95% of students quit before they reach black belt and if a failed test is all it takes to lose that student, mentally they were already gone.